SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for the fiscal year ended January 3, 1997 .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] for the transition period from to .
Commission file number 0-27258
SAGEBRUSH, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1875714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3238 West Main Street, Claremont, N.C. 28610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 459-0821
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x , No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of shares of the Registrant's no par value Common
Stock, its only class of voting stock, held by non-affiliates as of March 21,
1997 was $17,911,363.
The number of shares outstanding of the Registrant's no par value Common Stock,
its only outstanding class of common equity, as of March 21, 1997 was 6,300,000.
Documents Incorporated by Reference
Incorporated Document Parts into which Incorporated
Proxy Statement for Annual Meeting of Part III
Shareholders to be held May 8, 1997
Part I
Item 1 - Business.
General
Sagebrush, Inc. owns and operates 28 "Sagebrush Steakhouse & Saloon"
restaurants in North Carolina, South Carolina, Tennessee, and Virginia at March
21, 1997. The Company opened the first Sagebrush restaurant in Hickory, North
Carolina in October 1990. The Company's operations have expanded since then to
include a total of 28 Sagebrush restaurants. The weighted average annualized
sales per restaurant for the twelve months ended January 3, 1997 were
approximately $1.7 million each. Sagebrush, Inc., which was incorporated in
North Carolina in 1992 and had no operations prior to the Company's initial
public offering in January 1996, reorganized and consolidated the operations of
the 23 corporations (the "Related Corporations") which had conducted the
Company's business prior to such initial public offering (such reorganization
and consolidation is hereinafter referred to as the "Reorganization"). In
September 1996, Sagebrush, Inc. streamlined and simplified its organizational
structure by, among other things, consolidating certain of its operations in
newly-formed entities in North Carolina, South Carolina and Tennessee. (see Note
1 to the Consolidated Financial Statements) All references herein to the
"Company" include the business and operations of Sagebrush, Inc., its
subsidiaries and such Related Corporations.
The Sagebrush Concept
The Sagebrush concept is to serve high-quality, moderately-priced meals in a
casual, family-oriented atmosphere suggestive of a Texas roadhouse. The Company
seeks to locate its restaurants in smaller cities and suburban areas where they
fill a significant market niche. Sagebrush restaurants are distinguished from
other family-oriented steakhouses in these smaller markets (many of which are
cafeteria-style) by their full table service and attentive wait staff, full bar
service, entertaining atmosphere, distinctive decor and consistently high-
quality food. The Company distinguishes its restaurants from other full-service
restaurants through their family orientation which is accomplished by offering
lower priced food (such as hamburgers and sandwiches) at dinner, placing less
emphasis on alcohol sales as compared to most competitors and offering features
designed to appeal to children. The Company believes that the combination of
these factors makes its concept attractive to a broad range of consumers in the
markets it serves.
Sagebrush Menu
The Company's selective menu features high-quality aged steaks, prime rib,
chops, ribs, chicken and fish along with hamburgers and chicken sandwiches. The
Company's dinner menu includes nine steak entrees which are cut daily from
specially-selected U.S.D.A. choice aged western beef and prepared using the
Company's special seasoning. In addition to the regular menu items, each
restaurant has a daily, specially-priced "Blue Plate Special" at lunch which is
selected by its general manager and typically features fish, chicken or pork
chops. Each restaurant also has a "Little Pistols" children's menu featuring
hamburgers and sandwiches. All steaks come with a choice of Texas fries, baked
potato or baked sweet potato, a fresh garden salad and Texas toast. The menu
also includes specialty appetizers, desserts and full bar service where legally
permitted. The Company periodically tests new menu items in an effort to update
and adapt to changing customer preferences.
The Company's dinner entrees, which are also available at lunch, range in
price from $7.95 to $18.95, lunch entrees range in price from $3.95 to $5.95,
and appetizers are priced from $1.95 to $8.95. The average check per customer,
including beverages, is approximately $12.75 for dinner and $6.85 for lunch.
Menu prices are generally the same at each restaurant except for those located
in resort areas where seasonal factors require slightly higher prices. Sales of
alcoholic beverages, which are available in all but two of the Company's
restaurants, account for approximately 9% of the Company's revenues. Each
restaurant typically serves from 150-250 customers at lunch and from 250-300
customers at dinner during the week and from 100-300 customers at lunch and from
700-900 customers at dinner on weekends. The Company's restaurants do not serve
breakfast.
Atmosphere and Decor
The Company's restaurants feature a casual, family-oriented atmosphere
suggestive of a Texas roadhouse. The restaurants feature wood booths and walls,
and a mix of western memorabilia and other collectibles, including license
plates and signs from around the United States, photographs of sports figures
and movie stars, and a replica of an antique jukebox featuring country music.
In all areas of the restaurants, complimentary peanuts are offered and customers
are encouraged to drop their shells on the floor. Special effort is made to make
families with children feel welcome. A "Little Pistols" children's menu
featuring hamburgers and sandwiches is available, birthdays are recognized in
a special manner by the wait staff and servers offer balloons to children.
Site Selection
The Company considers the location of its restaurants to be important to its
long-term success and devotes significant effort to the investigation and
evaluation of potential sites. The Company's site selection process focuses on
trade area demographics, population density and household income levels, and
specific site characteristics such as visibility, accessibility, traffic volume
and parking as well as proximity to shopping centers, hotels and motels,
colleges and universities, large employers and tourist attractions. The Company
also reviews potential competition and the profitability of restaurants
operating in the area. Senior management inspects and approves each restaurant
site.
All but one of the Company's restaurants are located in freestanding
buildings that are generally located near interstate highways or other main
thoroughfares. Prior to 1996, the Company leased all but one of its restaurant
sites, and, with the exception of the Clemmons and Kernersville, North Carolina
restaurants, had established all of its restaurants by converting existing
buildings to the Sagebrush concept. The Company continued this method of
expansion in the first part of 1996 as the first four restaurants opened in 1996
were conversions of existing buildings, one of which was purchased rather than
leased.
The final two restaurants opened in 1996, Colonial Heights, Virginia and
Greenwood, South Carolina, however, represent methods of expansion that may be
relied upon by the Company more in the future. The Colonial Heights restaurant
is the Company's first non-freestanding location. It is a leased facility
located in an endcap of a high traffic, retail strip center. The location in
Greenwood is a Company-owned property and was built using the Company's new
prototype plan. While the Company will continue to attempt to locate facilities
to lease or buy and convert, the Company expects a higher proportion of
locations in the future will be established by purchasing land and building a
restaurant. This is primarily due to the difficulty of finding suitable
buildings in desirable locations that can be leased and renovated.
Because the Company has historically established its Sagebrush restaurants
in existing buildings which it remodeled for the Sagebrush concept, restaurant
sizes vary from approximately 4,500 to 8,500 square feet with the tables in the
dining area seating from approximately 150 to 280 people. The bar area of a
typical restaurant generally has seating capacity for approximately 20 people.
Most of the Company's restaurants also have a private banquet room seating from
25 to 50 people. Although the banquet facilities are often used for private
parties, they can also be used for general customer seating during peak dining
hours. The Company's prototype facility is approximately 6,500 square feet and
contains 208 dining seats and 37 seats in the bar area.
Converting Facilities to the Sagebrush Concept
The Company has been able to minimize start-up costs for its restaurants in
the past by leasing or buying existing restaurant facilities or other buildings
in the targeted areas of expansion, and converting them to the Sagebrush
concept. The Company has established all but three of its existing restaurants
in this manner. The Company engages an experienced contractor who is typically
able to convert a facility into a Sagebrush restaurant in six to seven weeks.
Restaurant furniture and equipment is generally purchased from a single
supplier, although the Company believes that there are a number of other
suppliers who could also furnish furniture and equipment at competitive prices.
The Company's cost of opening a new restaurant when it leases and renovates an
existing building is approximately $500,000, including the costs of renovating
the facility, purchasing equipment (if necessary) and training personnel.
Twenty-five of the Company's 28 existing restaurants have been conversions.
The Company established its Clemmons, North Carolina restaurant by erecting a
new building on leased property at a total cost of approximately $900,000, its
Kernersville, North Carolina restaurant by erecting a new building on purchased
property at a total cost of approximately $1.4 million and its Greenwood, South
Carolina restaurant by erecting a new building on purchased property at a total
cost of approximately $1.5 million. See "-Site Selection."
Restaurant Locations
The following table sets forth the location, opening date, seating capacity
(excluding bar area and private rooms) and approximate square footage of each
of the Company's 28 restaurants:
Seating Approximate
Date Opened Capacity Sq. Footage
North Carolina:
Hickory October 1990 158 5,000
Statesville October 1991 256 6,500
Boone June 1992 270 8,500
Hickory (Viewmont) July 1992 280 7,000
Morganton March 1993 252 6,300
Winston-Salem September 1993 180 6,500
Clemmons December 1993 265 6,800
Waynesville January 1994 270 6,800
Brevard March 1994 196 6,000
Arden August 1994 256 6,300
Wilkesboro September 1994 221 6,300
Monroe December 1994 236 6,800
Kernersville June 1995 200 6,800
Mount Airy January 1997 208 6,500
South Carolina:
Rock Hill December 1992 246 6,300
Gaffney December 1995 212 8,000
Greenwood November 1996 196 6,800
Tennessee:
Pigeon Forge September 1991 172 4,500
Oak Ridge November 1991 204 8,000
Knoxville February 1992 202 7,500
Kingsport February 1993 144 6,000
Sevierville May 1994 173 4,500
Gatlinburg April 1995 168 6,800
Johnson City March 1996 226 9,000
Alcoa June 1996 204 7,500
Morristown September 1996 226 9,000
Virginia:
Lynchburg July 1996 204 9,000
Colonial Heights October 1996 188 5,850
Restaurant Operations
Management and Employees. The management staff of a typical restaurant
consists of a general manager, a manager, an assistant manager and a kitchen
manager. Each restaurant also employs from 40 to 100 hourly employees, many of
whom work part-time. The general manager of each restaurant has primary
responsibility for the day-to-day operations of the restaurant and is
responsible for maintaining Company-established operating procedures. Two of
the managers are present at each restaurant from Monday through Thursday and
three of the managers are present at each restaurant from Friday through Sunday
of each week. General managers are required to supervise both the opening and
closing of their restaurant several times per week. The Company currently has
four area supervisors, each of whom currently oversees from six or seven
restaurants, and one director of training, who oversees one existing store and
all new stores from pre-opening through approximately twelve weeks of
operations.
The Company seeks managers with substantial restaurant experience and
requires all new managers, most of whom are college graduates, to complete a 28-
day orientation and training program at its Rock Hill, South Carolina
restaurant. The orientation and training program, which is conducted by the
Company's director of training, is designed to educate new managers in all
aspects of the Company's operations, including the Company's philosophy,
management strategy, policies, procedures and operating standards. The Company's
managers are required to know how to perform every job in a restaurant. The
Company also has hired consultants to assist in its training of junior managers.
After their initial training, managers attend monthly training sessions at the
Company's headquarters. The Company's senior management meets bi-weekly with
area supervisors to discuss restaurant operations. Senior management also
receives daily and weekly reports prepared by general managers and staff
accountants summarizing each restaurant's operations for the preceding week.
Based upon these reports, senior management is able to closely monitor and
supervise each restaurant's operations. Additionally, members of senior
management regularly visit each restaurant to ensure that the Company's
philosophy, strategy and standards of quality are being adhered to in all
aspects of restaurant operations.
A restaurant's general manager usually does the hiring for his or her
restaurant and is responsible for overseeing the training of new employees. The
general managers delegate certain of their responsibilities to the manager,
assistant manager and kitchen manager of the restaurant. The initial training
period for new employees lasts one to two weeks and is characterized by
on-the-job training by a certified unit trainer. All food servers are required
to pass a written test examining their knowledge of the menu and operating
procedures before they are allowed to serve customers. Ongoing training of
employees is the responsibility of each restaurant's general manager.
Restaurant managers are compensated by means of a base salary and an
incentive arrangement pursuant to which they receive additional compensation
based on their restaurant's pre-tax earnings. The Company also sponsors
contests for general managers based on the achievement of specified sales goals.
The Company generally prefers to draw a restaurant's general manager from
within the Company's organization. The Company's hourly employees are generally
paid at rates ranging from the minimum wage ($2.13 per hour for wait staff) to
$9.00 per hour.
Restaurant Reporting. Each restaurant's general manager is primarily
responsible for providing financial and other reports to the Company's
management. The general managers prepare weekly reports on daily sales, cash
deposits, customer counts, purchases, inventory and labor costs which are
reviewed by staff accountants. Monthly profit and loss statements are prepared
for each restaurant and reviewed by management. Physical inventory of beef is
taken on a daily basis and physical inventories of all other food, beverage and
supply items are taken on a bi-weekly basis.
Quality Assurance. The Company has adopted a number of measures to ensure
strict compliance with its operating standards and procedures. The Company's
senior management monitors each restaurant by reviewing the weekly reports
prepared by the Company's general managers and staff accountants, and by making
regular visits to and inspections of each restaurant. In order to avoid
employee theft, the Company has a strict policy that the back door of each of
its restaurants must be locked and secured by an alarm at all times unless a
manager is present at the door. The Company also engages an independent service
to visit periodically each of the Company's restaurants on an anonymous basis
and to submit reports to senior management focusing on factors such as food
quality, wait service and cleanliness and to summarize the overall dining
experience at each such restaurant.
Ingredients and Purchasing. As part of its commitment to using fresh, high
quality ingredients, the Company purchases only U.S.D.A. choice aged western
beef. Steaks are hand cut daily at each restaurant. In order to ensure the
uniform quality and freshness of the food served in its restaurants, the
Company establishes rigid specifications for all of its meat and produce. The
Company monitors the prices and specifications of the products it purchases in
order to ensure that it can consistently serve high quality food at competitive
prices. The Company currently purchases most of its food products from one
supplier, Biggers Brothers, Inc., from whom purchases during 1996 accounted for
approximately 90% of the Company's total food and beverage costs and
approximately 85% of its total cost of restaurant sales. The Company believes,
however, that products of comparable quality are available, or upon short
notice can be made available, from alternative suppliers. While food and
supplies are shipped directly to the restaurants, invoices for purchases are
sent by the supplier to the Company's headquarters in Claremont, North Carolina
for payment.
Marketing and Advertising. The Company uses radio advertising in all markets.
Most markets are clustered around media centers such as Charlotte, Asheville,
and Winston-Salem, North Carolina, Knoxville and Johnson City, Tennessee and
Roanoke, Virginia. The Company utilizes billboard advertising for restaurants
located in close vicinity to interstate highways. The Company uses aggressive
direct local marketing campaigns, including school programs, hotel marketing,
charitable and community events. The Company does not advertise in newspapers
or by distributing coupons.
Restaurant Industry and Competition
The restaurant industry generally, and the Company's business specifically,
are intensely competitive with respect to concept, price, service, location and
food quality and there are many well-established competitors, including a number
of other steakhouse and family-oriented restaurants with concepts similar to the
Company's, with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in or
decide to enter the markets where the Company's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns, and the type, number and location of competing restaurants.
The Company's revenues are derived primarily from the sale of beef and,
therefore, a change in consumer preferences for, or adverse publicity
associated with, beef could have an adverse effect on the Company's sales and
profitability. In addition, factors such as inflation, increased cost of food,
labor and benefits and the lack of experienced management and hourly employees
may adversely affect the restaurant industry in general and the Company's
restaurants and its ability to expand in particular.
The Company endeavors to compete with other restaurants primarily on the
basis of service, value, location and providing high quality meals in a casual,
family-oriented atmosphere. While the Company believes that it competes for
customers with a broad variety of other restaurants, there are several
restaurant chains, including Rare Hospitality, Inc. and Lone Star Steakhouse &
Saloon, Inc., which have restaurant concepts very similar to the Company's and
which currently operate in, or may further expand into, the Company's
geographic market areas and may be significant competitors.
Employees
As of January 3, 1997, the Company employed approximately 1,507 persons, of
whom 19 were corporate personnel, 131 were restaurant managers or supervisors
and approximately 1,357 were hourly employees. Of the 19 corporate employees, 6
were in management and 13 were in administrative positions. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
Trademarks
The Company has registered the service mark SAGEBRUSH STEAKHOUSE & SALOON(r)
with the United States Patent and Trademark Office. The Company regards its
service mark as having significant value and as being an important factor in the
marketing of its restaurants. While the Company is aware of names and marks
similar to the service mark of the Company used by other persons in certain
geographic areas, it does not believe that such uses will adversely affect the
Company. It is the Company's policy to oppose vigorously any infringement of its
marks in its marketing area.
Government Regulation and Potential Liabilities
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which include alcoholic
beverage control, health, safety, sanitation, building and fire agencies in the
state or municipality in which the restaurant is located. Difficulties in
obtaining or failing to obtain the required licenses or approvals could delay
or prevent the development of new restaurants in particular areas.
Approximately 9% of the Company's revenues are attributable to the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a state authority and, in certain locations,
to county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the Company's restaurants,
including the minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The loss, lapse or suspension of a
restaurant's food or liquor licenses could adversely affect the Company.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
the intoxicated person. The Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance and has never been named
as a defendant in a lawsuit involving such a dram-shop statute.
Although the Company has established and maintains high standards for
ingredients and food preparation at its restaurants, the restaurant and food
service industry generally is subject to potential liability for injuries to
customers resulting from food poisoning or similar causes due to faulty
ingredients or inadequate food preparation. Incidents of food poisoning at other
restaurants or restaurant chains have adversely affected such restaurants'
business and reputation.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and
tip credits. Significant numbers of the Company's food service and preparation
personnel are paid at hourly rates and increases in the federal minimum wage
could increase the Company's labor costs.
The Company's development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental laws
and regulations. Compliance with federal, state and local environmental laws
has not historically had a significant impact on the Company's capital
expenditures, earnings and competitive position.
Item 2 - Properties.
The Company, which maintains its executive offices in Claremont, North
Carolina, owns and operates 28 restaurants. The Company owns the property upon
which its Alcoa, Greenwood, Kernersville, Knoxville and Mount Airy restaurants
are located and leases its other restaurant sites. The Company's executive
offices and 14 of its restaurants are located on properties owned directly or
indirectly by certain shareholders of the Company and are leased to the Company.
The Company's remaining 10 restaurants are located on properties owned by
unaffiliated parties. The following table sets forth certain information
relating to the leases entered into in connection with the Company's facilities:
Approximate
Base Rent Approximate Date of
Per Basis for Date of Expiration
Base Rent/ Sq. Foot/ Calculation of Expiration of Last Renewal
Location Month (1) Month (2) Additional Rent (3) Current Term Option
Leases with related parties:
Claremont, N.C. (executive
offices) $2,300 $0.23 -- (4) --
Arden, N.C. $6,500 $1.03 5% of gross sales May 2004 May 2019
Asheville, N.C. (10) $5,000 $0.79 5% of gross sales April 1997 April 2007
Boone, N.C. $8,000 $0.94 5% of gross sales May 1997 May 2012
Brevard, N.C. $4,000 $0.67 5% of gross sales February 2004 February 2019
Hickory, N.C. $6,000 $1.20 -- September 2000 September 2005
Hickory, N.C. (Viewmont) $6,000 $0.86 5% of gross sales July 1997 July 2012
Johnson City, Tenn. $8,200 $0.91 -- January 1998 January 2008
Kingsport, Tenn.. $6,000 $1.00 5% of gross sales December 2003 December 2018
Monroe, N.C. $6,000 $0.88 (5) September 2004 September 2019
Morganton, N.C. $6,000 $0.95 5% of gross sales February 1998 February 2013
Morristown, Tenn. $8,000 $0.89 6% of gross sales November 1997 November 2007
Sevierville, Tenn. $6,500 $1.44 5% of gross sales April 2004 April 2019
Statesville, N.C. $3,500 $0.54 -- October 1997 October 2012
Waynesville, N.C. $4,000 $0.59 -- December 2003 December 2018
Wilkesboro, N.C. $5,200 $0.83 (6) August 2004 August 2019
Leases with unrelated parties:
Clemmons, N.C. $5,700 $0.84 4% of gross sales January 2009 January 2019
Colonial Heights, Va. $6,547 $1.12 (7) September 2006 September 2016
Gaffney, S.C. $5,000 $0.63 -- October 2005 October 2015
Gatlinburg, Tenn. $2,917 $0.43 5% of gross sales December 1999 December 2009
Lynchburg, Va. $5,000 $0.56 5% of gross sales September 2012 September 2012
Rock Hill, S.C. $3,440 $0.55 5% of gross sales October 1997 October 2012
Winston-Salem, N.C. $6,200 $0.95 (8) August 2000 August 2005
Ground leases with unrelated parties:
Knoxville, Tenn. $ 700 N/A (9) December 1999 December 1999
Oak Ridge, Tenn. $2,645 $0.33 2% of gross sales February 2004 February 2014
Pigeon Forge, Tenn. $1,873 $0.42 -- June 1998 June 2008
_____________________
(1) Base rent for the leases generally does not include taxes, utilities or
insurance, for which the Company is responsible. Additionally, most of the
leases provide either for (a) periodic adjustments in the rent payable based on
changes in the prime rate or (b) specified increased payments either during the
renewal terms or at other specified times.
(2) Because many of the Company's restaurants are conversions of existing
facilities of varying sizes, and because the additional rental payments are
based on gross sales and are not necessarily related to restaurant sizes,
comparisons of base rents per square foot among restaurants may not be
meaningful.
(3) Certain of the leases provide for contingent rental payments based on a
percentage of the applicable restaurant's gross sales. The additional rent
payable under these leases is generally equal to the difference between the
total base rent paid under the lease during the preceding year and the
indicated percentage of such restaurant's gross sales for such year.
(4) This property is leased on a month to month basis.
(5) Under this lease, the Company is required to pay as contingent rent by
October 5 of each year an amount equal to 5% of this restaurant's gross sales
in excess of $1,440,000 for the twelve-month period ending on September 20 of
such year.
(6) Under this lease, the Company is required to pay as contingent rent by
August 31 of each year an amount equal to 5% of this restaurant's gross sales
in excess of $1,248,000 for the twelve-month period ending on August 16 of such
year.
(7) Under this lease, the Company is required to pay as contingent rent each
year an amount equal to 3% of this restaurant's gross sales in excess of
$2,000,000 for the prior calendar year.
(8) Under this lease, the Company is required to pay as contingent rent by
March 1 of each year an amount equal to 5% of this restaurant's gross sales in
excess of $1,200,000 for the prior calendar year.
(9) Lease of additional parking area. Under a purchase agreement, the Company
is obligated to purchase this property for no greater than $144,000 no later
than December 31, 1999.
(10) Restaurant operations closed at the close of business on January 3, 1997.
Item 3 - Legal Proceedings.
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
Part II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
Matters.
Market Information
The common stock of Sagebrush, Inc. is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol SAGE. Stock price quotations
can be found in major daily newspapers and the Wall Street Journal. There was no
market for the common stock of Sagebrush, Inc. prior to the Company's initial
public offering. The stock began trading on January 11, 1996. At March 21, 1997,
there were 72 shareholders of record of the Company's Common Stock. The
following table shows, for the periods indicated, the high and low sales prices
per share for the common stock as reported by Nasdaq.
1996 High Low
First quarter 7 5/8 5 3/4
Second quarter 9 1/4 6 7/8
Third quarter 9 1/8 6
Fourth quarter 7 3/4 5 3/4
Dividends and Dividend Policy
Prior to its initial public offering, the Company's dividend policy was based
primarily on considerations relating to the "S Corporation" status of most of
the Related Corporations under Subchapter S of the Internal Revenue Code of 1986
and for state income tax purposes, and to the fact that most of the Related
Corporations were capitalized through equity investments with any associated
debt being incurred at the shareholder level. As a result of their S
Corporation status, the net income of most of the Related Corporations was taxed
directly to their shareholders rather than to the respective corporations.
Because of these factors, each of the Related Corporations historically
distributed all of its net income to its shareholders on a current basis. The
Company (including all Related Corporations) paid total cash dividends of
$888,000 in 1996 and $3,962,000 in 1995. The S Corporation elections of all
applicable Related Corporations were terminated in connection with the
Reorganization. Following the Reorganization and termination of such S
Corporation elections, the Company has been subject to corporate income
taxation as a C Corporation and has not paid dividends as a public company.
The Company anticipates that for the foreseeable future any earnings will be
retained to support the operation and expansion of the Company's business and
that it will not pay any cash dividends.
Recent Sales of Unregistered Securities
In connection with the Reorganization (which was consummated on January 17,
1996), the Company issued 4,500,000 shares of its Common Stock to shareholders
of the Related Corporations as part of the consideration for their exchange of
the capital stock of the Related Corporations. The 26 shareholders who received
such Common Stock in the Reorganization were either directors, prospective
directors, executive officers or management employees of the Company, members
of their families, or other persons having relationships with the Company or its
principals (including a public corporation engaged in the restaurant business
and two of its subsidiaries) who were familiar with the business and affairs of
the Company, were provided with substantially the same information as would have
been provided in a registration statement for such transaction, and acquired
such shares solely for investment. Although the Reorganization was contingent
upon the closing of the Company's initial public offering, the terms of the
Reorganization were agreed to by such shareholders prior to the filing of any
registration statement in connection with the Company's initial public offering.
Consequently, the Company believes that the issuance of its Common Stock to such
shareholders in the Reorganization was exempt from registration under Section
4(2) of the Securities Act of 1933.
Item 6 - Selected Financial Data.
The following selected consolidated and combined financial data as of the
end of and for each of the fiscal years in the five-year period ended January 3,
1997 are derived from the audited combined financial statements of the Company.
The combined selected financial data as of December 27, 1991 and for the year
ended were derived from unaudited financial statements. In the opinion of
management, such unaudited data reflect all adjustments necessary to reflect
properly the financial position and results of operations for the periods
presented. The selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein. See "Item 5. Market for the Registrant's
Common Stock and Related Stockholder Matters - Dividends and Dividend Policy"
for information relating to the Company's declaration of dividends.
(Dollars in thousands except per share data)
January 3, December 29, December 30, December 31, January 1,
Fiscal Year Ended 1997 1995 1994 1993 1993
Selected Income Statement Data:
Net sales $ 42,110 $ 34,020 $ 28,664 $ 19,272 $ 10,577
Net income $ 2,459 $ 3,524 $ 3,155 $ 1,887 $ 774
Net income per share $ .39
Selected Balance Sheet Data:
Total assets $ 17,205 $ 10,820 $ 8,736 $ 5,577 $ 3,574
Long-term debt, including
current maturities - $ 2,188 $ 1,387 $ 1,028 $ 953
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Since opening the first Sagebrush restaurant in Hickory, North Carolina
in October 1990, the Company's operations have grown to include 28 restaurants
in North Carolina, South Carolina, Tennessee and Virginia at January 3, 1997.
From 1993 to 1996, the Company's revenues increased from approximately $19.3
million to $42.1 million. The rapid growth in the Company's revenues has
resulted primarily from an increase in the number of the Company's restaurants.
The Company opened three restaurants in 1991, five in 1992, four in 1993, six
in 1994, three in 1995 and six in 1996. The Company's operating income has
increased from $2.0 million in 1993 to $3.9 million in 1996. The Company
believes that these favorable trends in both its revenues and operating income
have been achieved as a result of its attracting and retaining experienced
employees, implementing an effective management development program and
adopting measures to ensure strict compliance with its operating standards
and procedures.
Substantially all of the Company's revenues are derived from restaurant
sales with approximately 9% of such revenues attributable to sales of alcoholic
beverages.
Cost of restaurant sales consists of food, beverage and supply costs.
Labor costs include salaries, wages and benefits of all restaurant level
employees.
Other operating expenses principally consist of restaurant occupancy costs
such as rent, utilities, building maintenance, insurance and taxes, as well as
equipment rentals and repairs, bank transaction charges and miscellaneous
restaurant expenses.
General and administrative expenses consist of wages for management,
supervisory and other corporate personnel, and other personnel costs, costs of
advertising and promotions and other expenses.
Depreciation of property and equipment is provided primarily over the
estimated useful lives of the respective assets on a straight-line basis.
Amortization expense principally includes pre-opening costs which consist
of labor costs, costs of hiring and training personnel, and certain other costs
relating to opening new restaurants. These costs are capitalized until the
restaurant is opened and then amortized over a twelve-month period.
In connection with the reorganization effected immediately prior to the
completion of the initial public offering of Common Stock of Sagebrush, Inc. in
January 1996, the S Corporation elections of certain of the Related Corporations
were terminated, and salaries payable to certain of the Company's principal
executive officers were increased to more representative levels. If the increase
in executive salaries had been in effect since the beginning of 1995, expenses
would have increased by approximately $500,000 in 1995.
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with its Consolidated Financial
Statements and the Notes thereto included elsewhere in this Annual Report.
Fiscal 1996 and 1992 consisted of 53 weeks and all other fiscal years presented
herein consisted of 52 weeks. The Company's fiscal quarters consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively.
Results of Operations
The following table sets forth for the periods indicated the percentages
of revenues - restaurant sales represented by items in the Company's
consolidated statements of income.
Fiscal Year
1991 1992 1993 1994 1995 1996
Revenues - restaurant sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of restaurant sales 38.8 38.7 38.3 38.0 37.4 36.9
Labor costs 28.7 28.0 26.6 26.2 26.3 27.1
Other operating expenses 14.2 14.3 14.1 14.2 15.4 14.6
General and administrative expenses 14.7 7.4 7.0 7.0 7.0 8.5
Depreciation 3.9 2.0 1.8 1.8 2.2 2.3
Amortization (principally of
pre-opening costs) 2.8 2.5 1.8 1.2 1.0 1.0
Store closing cost .4
Total operating costs and expenses 103.1 92.9 89.6 88.4 89.3 90.8
Operating income (loss) (3.1) 7.1 10.4 11.6 10.7 9.2
Other income, net 3.2 .9 .4 .3 .3 .2
Interest income .3
Interest expense (1.0) (.7) (.3) (.3) (.4) (.1)
Income (loss) before income taxes (.9) 7.3 10.5 11.6 10.6 9.6
Income tax provision .7 .6 .2 3.7
Net income (loss) (.9)% 7.3% 9.8% 11.0% 10.4% 5.9%
Pro forma net income (1) 5.6%
(1) Includes proforma effects of executive salaries ($500,000) and
income taxes ($1.2 million).
The following table sets forth selected operating data for the
periods indicated.
(Dollars in thousands) Fiscal Year
1991 1992 1993 1994 1995 1996
Restaurants open at the
beginning of the year 1 4 9 13 19 22
Restaurants opened
during the year 3 5 4 6 3 6
Restaurants open at the
end of the year 4 9 13 19 22 28
Restaurant sales $1,955 $10,577 $19,272 $28,664 $34,020 $42,110
Weighted average sales
per restaurant $1,240 $ 1,602 $ 1,746 $ 1,783 $ 1,677 $ 1,726
Weighted average weekly
sales per restaurant $ 23.8 $ 30.2 $ 33.6 $ 34.3 $ 32.2 $ 32.6
The table below presents a progression of restaurant sales presented by
the year in which the Company's restaurants began operations. Results for the
first year of each restaurant's operations reflect its sales from the date of
opening through fiscal year end.
Restaurant Openings
(Dollars in thousands)
Fiscal Year
Year Number 1990 1991 1992 1993 1994 1995 1996
1990 1 $ 222 $ 1,225 $ 1,681 $ 1,873 $ 2,094 $ 2,110 $ 2,126
1991 3 730 4,343 4,886 5,100 5,168 5,200
1992 5 4,553 8,707 9,008 8,726 8,522
1993 4 3,806 6,675 6,410 6,452
1994 6 5,787 9,419 9,324
1995 3 2,187 4,892
1996 6 5,594
Total 28 $ 222 $ 1,955 $ 10,577 $ 19,272 $ 28,664 $ 34,020 $ 42,110
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues. Revenues increased $8.1 million, or 23.8%, from $34.0 million in
1995 to $42.1 million in 1996. This increase resulted from an increase in the
number of restaurants operated by the Company from 22 to 28, as well as a slight
increase in revenues of .6% for restaurants open over eighteen months.
Cost of restaurant sales. Cost of restaurant sales increased $2.8 million,
or 22.1%, from $12.7 million to $15.5 million, and as a percentage of revenues
decreased from 37.4% to 36.9%. This decrease as a percentage of revenues
principally resulted from reduced food costs realized from lower market prices
and improved purchasing practices.
Labor costs. Labor costs increased $2.5 million, or 27.6%, from $9.0
million to $11.4 million, principally due to the increase in the number of
restaurants. As a percentage of revenues, labor costs increased from 26.3% to
27.1%. The increase is primarily the result of an increase in costs associated
with the Company's management training program due to the increased number of
restaurant openings in 1996.
Other operating expenses. Other operating expenses increased $900,000,
or 17.2%, from $5.2 million to $6.1 million, and as a percentage of revenues
decreased from 15.4% to 14.6%. The improvement as a percentage of sales was due
to most operating expenses rising less than the percentage increase in sales
and three restaurants being owned rather than leased.
General and administrative expenses. General and administrative expenses
increased $1.2 million, or 50.0%, from $2.4 million to $3.6 million, and as a
percentage of revenues increased from 7.0% to 8.5%. Adjusting 1995 general and
administrative expenses for the approximately $500,000 increase in executive pay
related to the reorganization discussed above, general and administrative
expenses for 1995 as a percentage of revenue would have been 8.4%.
Depreciation. Depreciation increased $215,000, or 28.2%, from $761,000 to
$976,000, and as a percentage of revenues increased from 2.2% to 2.3% primarily
because of increased investment in property and equipment related to the new
restaurants.
Amortization. Amortization of pre-opening costs increased $121,000, or
38.7%, from $314,000 to $435,000, and as a percentage of revenues remained
constant. The increase was due to an increase in the number of restaurants
opened in 1996 compared to 1995.
Store closing cost. During the fourth quarter of 1996, the Company
recorded a pre-tax charge of $168,000 relating to the closing of its restaurant
in Asheville, North Carolina at the close of business on January 3, 1997. The
restaurant was unprofitable and did not meet company operating expectations. The
declining sales at this restaurant were primarily attributable to a poor
location. The charge includes the expenses of closing and writing down assets
to estimated net realizable value.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, declined due to a decrease
in the number of those restaurants.
Interest income. The Company had interest income during fiscal 1996
as a result of investments of the proceeds from the Company's initial public
offering.
Interest expense. Interest expense decreased $105,000 from $151,000 to
$46,000 primarily as a result of a decrease in the Company's borrowings in 1996.
Income tax provision. The Company's effective tax rate for fiscal 1996 was
39.0%. Prior to January 1996, most of the corporations comprising the Company
were S corporations for federal and state income tax purposes, with taxable
income allocated to shareholders rather than taxed at the corporate level. All
applicable S Corporation elections were terminated in January 1996 in connection
with the reorganization effected in connection with the Company's initial public
offering. (See Note 7 to the Consolidated Financial Statements)
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenues. Revenues increased $5.3 million, or 18.7%, from $28.7 million in
1994 to $34.0 million in 1995. This increase resulted from an increase in the
number of restaurants operated by the Company from 19 to 22, and was offset
slightly by a decrease in revenues of 1.9% in restaurants open for both years.
Three of the restaurants experienced revenue decreases significantly greater
than the average decrease in restaurants open for both periods. The remaining
ten restaurants open for both periods had an average sales growth of .8%.
Cost of restaurant sales. Cost of restaurant sales increased $1.8 million,
or 16.9%, from $10.9 million to $12.7 million, and as a percentage of revenues
decreased from 38.0% to 37.4%. This decrease as a percentage of revenues
principally resulted from reduced food costs (primarily beef and potatoes)
realized from lower market prices and improved purchasing practices, as well
as improved security and waste management.
Labor costs. Labor costs increased $1.4 million, or 19.1%, from $7.5
million to $9.0 million, principally due to the increase in the number of
restaurants. As a percentage of revenues, labor costs increased slightly from
26.2% to 26.3%.
Other operating expenses. Other operating expenses increased $1.1 million,
or 29.0%, from $4.1 million to $5.2 million, and as a percentage of revenues
increased from 14.2% to 15.4%. This increase as a percentage of revenues
principally resulted from certain of the Company's leases with affiliates being
amended to conform the terms thereof to the terms of other leases with
affiliates and certain third parties, which provide for contingent rental
payments based on a percentage of the applicable restaurant's gross sales.
General and administrative expenses. General and administrative expenses
increased $360,000, or 17.8%, from $2.0 million to $2.4 million, and as a
percentage of revenues remained constant at 7.0%.
Depreciation. Depreciation increased $235,000, or 44.6%, from $526,000 to
$761,000, and as a percentage of revenues increased from 1.8% to 2.2% primarily
because of increased investment in property and equipment.
Amortization. Amortization of pre-opening costs decreased $38,000, or
10.9%, from $352,000 to $314,000, and as a percentage of revenues decreased
from 1.2% to 1.0%.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, remained constant as a
percentage of restaurant sales.
Interest expense. Interest expense increased $76,000 from $75,000 to
$151,000 as a result of the Company's incurring additional indebtedness during
late 1994 and early 1995 principally to fund new store openings.
Quarterly Results
The following table sets forth the Company's revenues, income before income
taxes, income before income taxes as a percentage of revenues, and number of
restaurants in operation at the end of the period for each quarter of 1995 and
1996. In the opinion of management, the unaudited financial statements from
which these data have been derived include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The Company's fiscal quarters consist of 12, 12,
12 and 16 or 17 weeks, respectively (16 weeks in 1995 and 17 weeks in 1996).
Fiscal 1995 Fiscal 1996
Quarter: First Second Third Fourth First Second Third Fourth
(Dollars in thousands)
Revenues - restaurant sales $7,224 $7,698 $8,460 $10,638 $7,832 $8,932 $10,051 $15,295
Income before income taxes $ 753 $ 717 $ 916 $ 1,215 $ 773 $ 998 $ 1,018 $ 1,245
Income before income taxes
as a percentage of revenues 10.4% 9.3% 10.8% 11.4% 9.9% 11.2% 10.1% 8.1%
Restaurants in operation at
end of quarter 19 20 21 22 23 23 26 28
Quarterly results have been, and in the future are likely to be,
substantially affected by the timing of new restaurant openings. Management
believes that there is a degree of seasonality in the Company's business with
sales being lower in January and February of each year. The first quarter of
1996 was impacted by unusually severe weather in most of the area served by the
Company.
Liquidity And Capital Resources
In January 1996, the Company completed its initial public offering and, after
deducting the underwriting discount and expenses of the offering, received
approximately $11.1 million in total proceeds (including proceeds received in
February 1996 from the underwriter's exercise of its option to purchase
additional shares to cover over- allotments). The Company used approximately
$5.2 million of the proceeds to fund cash payments to or for the benefit of
shareholders of the Related Corporations in connection with the reorganization
effected immediately prior to the initial public offering, and approximately
$2.2 million of the proceeds to repay indebtedness. The remaining $3.8 million
of the proceeds, together with the cash flow from operations, was used to
finance the development of additional restaurants and for general working
capital purposes.
At January 3, 1997, the Company had approximately $1.6 million in cash and
short term investments, $460,000 in short-term debt and $13.8 million in
shareholders' equity. At January 3, 1997, the Company had a revolving credit
facility with a commercial bank that provided for borrowings up to $6.0 million
(with a participation by another bank for advances over $3.0 million). This
facility expired on January 31, 1997 and was renewed through January 31, 1998
to provide for borrowings of up to $3.0 million (without any other bank
participation). Advances under the line of credit are unsecured, limited to
short-term working capital purposes and bear interest at the bank's prime rate.
At January 3, 1997, $460,000 was outstanding under the line, which was also the
maximum amount outstanding during fiscal 1996. (See Note 4 to the Consolidated
Financial Statements)
The Company primarily requires capital for the development and opening of
new restaurants. Prior to the Company's initial public offering, the Company
financed most of its capital expenditures with cash provided by operating
activities, proceeds from the issuance of common stock of the Related
Corporations, and from other shareholder contributions.
Because most of the Company's restaurants have been established by converting
existing restaurant facilities to the Sagebrush concept, the Company's capital
expenditures principally have been for leasehold improvements, machinery,
equipment, furniture and fixtures. The Company's substantial growth has not
historically required significant additional working capital. Sales are
predominantly cash, and the business does not require the maintenance of
significant receivables or inventories. In addition, it is common to receive
trade credit on the purchase of food, beverage and supplies, thereby reducing
the need for incremental working capital to support sales increases.
The Company currently plans to open approximately eight restaurants in 1997.
The Company now operates 28 restaurants in North Carolina, South Carolina,
Tennessee and Virginia. Fiscal 1996 fourth quarter restaurant openings were in
Colonial Heights, Virginia and Greenwood, South Carolina. The Company opened a
restaurant in Mount Airy, North Carolina on January 14, 1997, and construction
has started on restaurants in Salisbury and Lenoir, North Carolina, and Roanoke,
Virginia.
The Company has historically established most of its restaurants by leasing
and renovating existing facilities to the Sagebrush concept. In 1996, the
Company established two of its six new restaurants by purchasing land and
building a new restaurant. The remaining four restaurants were established
by renovating existing facilities, one of which was purchased and the remaining
three leased. The Company anticipates, however, that a higher proportion of new
restaurants in the future will be acquired by purchasing land and building a new
restaurant due to the increased difficulty of finding suitable buildings in
desirable locations that can be leased and renovated. The Company's cost of
opening a restaurant when the Company leases and renovates an existing building
is approximately $500,000, including the costs of renovating the facility,
purchasing necessary equipment and training personnel. The Company's cost of
building a restaurant on land the Company purchases ranges from $1.2 million to
$1.6 million, with the largest variance related to the cost of land. Assuming
that the Company opens a total of 8 restaurants in 1996 (and that five or six of
such restaurants involve purchasing land and building a new facility and two or
three are established by leasing and renovating an existing facility),
management expects capital expenditures to range from $9.0 million to $11.0
million. Management believes that available cash, cash generated by operations
and available borrowings under the Company's $3.0 million line of credit
together with the real estate secured borrowings described below will be
adequate to fund the Company's working capital and capital expenditure
requirements through the end of 1997. Management expects to finance part of the
cost of establishing new restaurants opened on real property purchased by the
Company by borrowings from commercial banks secured by such real property. In
the event the Company's operating results fall short of its projections or the
borrowings described above are insufficient to fund its capital expenditure
requirements, the Company could be required to seek additional financing. For
any such additional financing, the Company will consider borrowings from
commercial lenders and other sources of debt financing as well as equity
financing. No assurance can be given, however, that the Company will be able
to obtain any such additional financing when needed upon terms satisfactory to
the Company.
Inflation
The impact of inflation on food, labor, equipment, land and construction costs
could affect the Company's operations. A majority of the Company's employees
are paid hourly rates related to federal and state minimum wage laws. In
addition, most of the Company's leases require the Company to pay taxes,
insurance, maintenance, repairs and utility costs, and these costs are subject
to inflationary pressures. The Company may attempt to offset the effect of
inflation through periodic menu price increases, economies of scale in
purchasing and cost controls and efficiencies at existing restaurants.
Management believes that inflation has had no significant impact on costs
during fiscal 1995 or 1996, primarily because the largest single item of
expense, food costs, has remained relatively stable during this period.
Additionally, the increase in the minimum wage has had little effect since
the rate paid to servers, the largest group of the Company's employees
subject to minimum wage, was unchanged.
Impact of Recently Issued Accounting Pronouncements
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed Of," during 1996. It requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. It also
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell. Management has reviewed all long-lived assets as of January 3, 1997 and
believes that the carrying amounts reported in the balance sheet represent the
amounts expected to be recovered over the remaining useful lives of those
assets.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
Statement is generally effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
Management believes that the implementation of the Statement will not have
any material impact on the Company's financial position or results of
operations.
Cautionary Statement as to Forward Looking Information
Statements contained in this report as to the Company's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for the future operations are
"forward looking" statements, and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such forward
looking statements include, without limitation: the significant effect on the
Company's results of operations that one or several of its restaurants could
have were it or they to be unsuccessful; adverse changes in economic, weather
or other conditions in the relatively small geographic area in which the
Company's restaurants are located; risks associated with the Company's expansion
strategy, including those associated with locating appropriate restaurant sites,
establishing restaurants at those locations, hiring and training sufficiently
skilled management and other personnel, securing required governmental approvals
and permits, and obtaining adequate financing; increased competition; adverse
changes in consumer preferences for, or adverse publicity associated with,
beef; increased food costs; adverse changes in the availability of supplies;
adverse changes in governmental regulation relating to the Company's business;
the loss or suspension of any of the Company's licenses or permits; the loss of
the services of any of the Company's key management or other personnel; and
other factors that generally effect the Company's operations and the restaurant
industry in general. Item 8 - Financial Statements and Supplementary Data.
Independent Auditors' Report
To the Board of Directors and Shareholders
of Sagebrush, Inc.:
We have audited the accompanying consolidated balance sheets of
Sagebrush, Inc. and subsidiaries (the "Company") as of January 3,
1997 and December 29, 1995, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three
fiscal years in the period ended January 3, 1997. As discussed in
Note 1, the financial statements as of December 29, 1995 and for each
of the two fiscal years in the period then ended include the combined
accounts of several commonly owned corporations which became wholly-
owned subsidiaries of Sagebrush, Inc. in January, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at January
3, 1997 and December 29, 1995, and the results of its operations and
its cash flows for each of the three fiscal years in the period ended
January 3, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
February 27, 1997
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1997 and December 29, 1995
January 3, December 29,
1997 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,570,515 $ 2,145,809
Related party receivables (Note 6) 24,175 127,423
Other receivables 250,761 58,870
Inventories (Note 2) 495,848 411,675
Pre-opening costs, net (Note 2) 509,210 131,434
Prepaid and other current assets (Note 1) 80,613 370,390
Total current assets 2,931,122 3,245,601
PROPERTY AND EQUIPMENT, NET (Notes 2 and 3) 14,262,732 7,562,432
OTHER ASSETS 11,293 12,266
TOTAL ASSETS $17,205,147 $10,820,299
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank (Note 4) $ 460,000 $ -
Accounts payable(including $115,094 at January 3, 1997
and $98,724 at December 29, 1995 to related parties) 1,688,867 1,220,206
Accrued salaries 283,467 414,625
Taxes other than income 313,010 188,338
Other accrued liabilities 462,807 463,893
Total current liabilities 3,208,151 2,287,062
LONG-TERM DEBT (Notes 4 and 6) (including
$4,822 at December 29, 1995 to related parties) - 2,187,909
DEFERRED INCOME TAXES (Note 7) 208,471 549
Total liabilities 3,146,622 4,475,520
SHAREHOLDERS' EQUITY (Note 1):
Common stock ($1.00 par value; 50,000,000 shares
authorized; 6,300,000 shares issued and outstanding
at January 31, 1997) 6,300,000 -
Common stock of combined companies - 535,202
Additional paid-in capital 7,369,068 7,261,164
Retained earnings (deficit) 119,457 (1,451,587)
Total shareholders' equity 13,788,525 6,344,779
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,205,147 $10,820,299
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 3, 1997, December 29, 1995 and December 30, 1994
Year Ended
January 3, December 29, December 30,
1997 1995 1994
REVENUES - restaurant sales $ 42,110,051 $ 34,019,810 $ 28,664,211
OPERATING COSTS AND EXPENSES (Notes 5 and 6)
Cost of restaurant sales 15,546,906 12,732,990 10,888,664
Labor costs 11,422,845 8,953,428 7,519,222
Other operating expenses (including $2,090,560,
$1,926,178 and $990,979 for fiscal years 1996,
1995 and 1994, respectively, paid to related 6,133,256 5,233,973 4,055,921
General and administrative expenses 3,560,928 2,373,978 2,014,452
Depreciation 975,827 760,881 526,328
Amortization (principally of pre-opening costs) 435,238 313,780 352,040
Store closing cost 167,890 - -
Total operating costs and expenses 38,242,890 30,369,030 25,356,627
OPERATING INCOME 3,867,161 3,650,780 3,307,584
OTHER INCOME (received from related parties) (Note 6) 84,150 101,175 84,957
INTEREST INCOME 128,826 - -
INTEREST EXPENSE (45,609) (150,980) (74,915)
INCOME BEFORE INCOME TAXES (Note 7) 4,034,528 3,600,975 3,317,626
INCOME TAX PROVISION (1,575,296) (76,915) (163,052)
NET INCOME $ 2,456,232 $ 3,524,060 $ 3,154,574
NET INCOME PER SHARE $ 0.39
WEIGHTED AVERAGE SHARES OUTSTANDING 6,288,949
PRO FORMA - UNAUDITED: (Note 11)
Historical income before income taxes $ 3,600,975
Pro forma adjustment for compensation (500,000)
Pro forma income before income taxes 3,100,975
Pro forma income taxes (1,209,380)
Pro forma net income $ 1,891,595
Pro forma net income per share $ 0.35
Pro forma weighted average shares outstanding 5,462,748
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended January 3, 1997, December 29, 1995 and December 30, 1994
Additional
Common Paid-in
Stock Capital Deficit Total
BALANCE AT DECEMBER 31, 1993 $ 210,200 $ 3,572,386 $ (604,168) $ 3,178,418
Issuance of common stock 245,000 2,205,000 2,450,000
Capital contributions 294,468 294,468
Net income 3,154,574 3,154,574
S Corporation distributions and dividend (3,563,663) (3,563,663)
BALANCE AT DECEMBER 30, 1994 455,200 6,071,854 (1,013,257) 5,513,797
Issuance of common stock 80,002 925,000 1,005,002
Capital contributions 264,310 264,310
Net income 3,524,060 3,524,060
S Corporation distributions and dividend (3,962,390) (3,962,390)
BALANCE AT DECEMBER 29, 1995 535,202 7,261,164 (1,451,587) 6,344,779
Payments to and exchanges with
shareholders related to reorganization 3,964,798 (9,117,298) (5,152,500)
Net proceeds of public offering 1,800,000 9,225,202 11,025,202
Net income 2,459,232 2,459,232
S Corporation distributions and dividend (888,188) (888,188)
BALANCE AT JANUARY 3, 1997 $ 6,300,000 $ 7,369,068 $ 119,457 $ 13,788,525
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Fiscal Years Ended January 3, 1997 and December 29, 1996
Year Ended
January 3, December 30, December 29,
1997 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,459,232 $ 3,524,060 $ 3,154,574
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 975,827 760,881 526,328
Amortization (principally of pre-opening costs) 435,238 313,780 352,040
Changes in operating assets and liabilities
providing (using) cash:
Receivables (61,643) 52,925 (83,446)
Inventories (84,173) (36,385) (156,814)
Pre-opening costs (813,014) (225,845) (442,562)
Deferred income tax 207,922 (21,961) 1,804
Trade accounts payable and
other accrued liabilities 461,809 474,946 462,563
Total adjustments 1,015,807 946,277 712,786
Net cash provided by operating activities 3,475,039 4,470,337 3,867,360
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including $931,879,
$287,368 and $397,438 in fiscal years
1996, 1995 and 1994, respectively, paid
to related parties) (7,676,127) (2,311,057) (2,479,601)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 460,000 1,329,629 262,000
Repayment of debt (2,187,909) (529,163) (202,588)
Purchase of assets related to reorganization (1,652,500) - -
Cash paid to shareholders related to
reorganization (3,500,000) - -
S Corporation distributions and dividends paid (888,188) (3,962,390) (3,563,663)
Proceeds of issuance of common stock 11,394,391 - -
Capital contributions - 1,506,312 2,725,468
Net cash provided by (used in)
financing activities 3,625,794 (1,655,612) (778,783)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (575,294) 503,668 608,976
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,145,809 1,642,141 1,033,165
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,570,515 $ 2,145,809 $ 1,642,141
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 45,609 $ 147,810 $ 74,915
Cash paid for income taxes $ 1,496,642 $ 132,088 $ 176,489
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Sagebrush issued common stock in exchange for notes receivable of $27,000 and
$264,000 in fiscal 1995 and 1994, respectively.
Sagebrush acquired land in fiscal 1994 in exchange for cash of $85,000 and a
note payable of $300,000.
See accompanying notes to consolidated financial statements.
SAGEBRUSH, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 3, 1997, December 29, 1995 and December
30, 1994
NOTE 1 - Basis of Presentation and Initial Public Offering of Common
Stock
The consolidated financial statements as of and for the year ended
January 3, 1997 ("Fiscal 1996") include the accounts of Sagebrush,
Inc. and its subsidiaries (the "Company"), all of which are wholly
owned. The financial statements as of and for the years ended
December 29, 1995 ("Fiscal 1995") and December 30, 1994 ("Fiscal
1994") represent combined financial statements of Sagebrush, Inc. and
affiliated companies prior to the reorganization discussed below. All
intercompany accounts and transactions have been eliminated in the
consolidated/combined financial statements.
The combined financial statements for Fiscal 1995 and 1994 include
the accounts of Sagebrush, Inc., and 22 corporations operating
restaurants (the "Restaurant Corporations") under the name of
"Sagebrush Steakhouse and Saloon." In addition, to the extent
considered attributable to "Sagebrush Steakhouse and Saloon"
restaurants, the combined financial statements include the accounts
of Connor Management, Inc. ("Connor Management"), which provided
development, management and administrative services to the Restaurant
Corporations and to certain other corporations operating other
restaurants. The Restaurant Corporations and Connor Management are
collectively referred to as the "Related Corporations." In connection
with Sagebrush's initial public offering in January 1996, a
reorganization was effected which resulted in the Related
Corporations becoming wholly-owned subsidiaries of, or transferring
all of their assets to, Sagebrush, Inc., with shareholders of such
corporations becoming shareholders of Sagebrush, Inc. The combination
was accounted for at historical cost in a manner similar to a pooling-
of-interests due to the entities being under common management and
control and the absence of significant monetary consideration to the
shareholders. The Restaurant Corporations and the applicable
operations and accounts of Connor Management, Inc., as well as
Sagebrush, Inc., are collectively referred to herein as the
"Company."
This reorganization was effected immediately prior to the initial
public offering of common stock of Sagebrush, Inc. in January 1996.
In conjunction with the reorganization of the Related Corporations,
Sagebrush completed the initial public offering of its Common Stock,
selling 1,700,000 shares in January 1996 and 100,000 shares in
February 1996 upon the underwriter's exercise of its over-allotment
option. Net proceeds from the offering were $11,025,000. A portion of
the net proceeds were used to repay corporate indebtedness (see Note
4) and to fund cash payments to or for the benefit of current
shareholders in connection with the reorganization. The remaining
portion of the net proceeds has been used to finance the development
of additional restaurants and for other general corporate purposes.
In connection with the reorganization, the shareholders of the
Related Corporations (other than those formed to operate the
Gatlinburg, Kernersville and Gaffney restaurants) contributed their
capital stock in these corporations to Sagebrush, Inc. for an
aggregate of 4,500,000 shares of Sagebrush, Inc. common stock and
cash of $3.5 million. As a result of the reorganization, shareholders
of these corporations became the shareholders of Sagebrush, Inc.,
owning all 4,500,000 shares of its common stock outstanding
immediately prior to its initial public offering. Proceeds of the
initial public offering were also used to purchase the assets of the
Gatlinburg, Kernersville and Gaffney restaurants for a total
consideration of approximately $1.7 million, which represents the
historical cost of such assets. The accounts of the Gatlinburg,
Kernersville and Gaffney restaurants, opened in April, June and
December of 1995, respectively, are included in the combined
financial statements as of and for the year ended December 29, 1995.
In connection with the reorganization and the completion of the
public offering, the following structural and organizational changes
were effected: (i) the Related Corporations formerly operating as S
Corporations became subject to corporate income taxation as C
Corporations and (ii) salaries payable to certain executive officers
were adjusted to more representative levels as a result of the
termination of the S Corporation elections and the elimination of the
related distributions.
Costs associated with the public offering were offset against
proceeds from the sale of stock. Such costs incurred prior to
December 29, 1995 totaled $369,000 and have been included in prepaid
and other current assets on the balance sheet as of that date.
In September 1996, in order to streamline the Company's operations
and organizational structure, Sagebrush, Inc. caused, among other
things, (a) the assets and liabilities of the North Carolina
Restaurant Corporations to be transferred in liquidation to a North
Carolina limited liability company, (b) the assets and liabilities of
the South Carolina Restaurant Corporations to be transferred in
liquidation to a South Carolina limited liability company, (a) the
assets and liabilities of the Tennessee Restaurant Corporations to be
transferred to a Delaware limited partnership, and (d) Sagebrush of
Virginia, Inc. (which owned and operated all of the Company's
Virginia restaurants) and Connor management to be liquidated into
Sagebrush, Inc.
Certain information concerning the corporations included in the
combined financial statements follows:
Common Stock of Combined Companies
Shares issued as of
Commencement December 29,
Entity of Operations 1995
Sagebrush, Inc. 2
Connor Management, Inc. 1,000
Tumbleweed, Inc. Oct 1990 100
Tumbleweed of Pigeon Forge, Inc. Sep 1991 10,000
Tumbleweed of Statesville, Inc. Oct 1991 100
Oak Ridge Foods, Inc. Nov 1991 10,000
Knoxville Foods, Inc. Feb 1992 1,000
Sagebrush of Asheville, Inc. Apr 1992 1,000
Sagebrush of Boone, Inc. Jun 1992 1,000
Viewmont Foods, Inc. Jul 1992 1,000
Sagebrush of Rock Hill, Inc. Dec 1992 30,000
Kingsport Foods, Inc. Feb 1993 10,000
Sagebrush of Morganton, Inc. Mar 1993 35,000
Sagebrush of Winston, Inc. Sep 1993 35,000
Sagebrush of Clemmons, Inc. Dec 1993 40,000
Sagebrush of Waynesville, Inc. Jan 1994 35,000
Sagebrush of Brevard, Inc. Mar 1994 40,000
Sagebrush of Sevierville, Inc. May 1994 35,000
Sagebrush of Arden, Inc. Aug 1994 40,000
Sagebrush of Wilkesboro, Inc. Sep 1994 40,000
Sagebrush of Monroe, Inc. Dec 1994 40,000
Gatlinburg Foods, Inc. Apr 1995 40,000
Forsyth Land Company Jun 1995 50,000
Sagebrush of Gaffney, Inc. Dec 1995 40,000
Total 535,202
All shares are recorded at a par or stated value of $1.
At December 29, 1995, the Related Corporations had varying
percentages of common ownership with five individuals and one
corporation (and its subsidiaries) having direct and indirect
ownership interest in all of the Related Corporations in amounts
greater than 50%.
In November 1995, the Company amended and restated its articles of
incorporation to authorize the issuance of up to 50,000,000 shares of
common stock and 10,000,000 shares of preferred stock in one or more
series, with such preferences, limitations and relative rights as
will be determined by the Board of Directors at the time of issuance.
No shares of preferred stock have been issued.
NOTE 2 - Summary of Significant Accounting Policies
Fiscal Year - The Company's fiscal year ends on the Friday nearest
December 31. Fiscal 1996 includes 53 weeks, Fiscal 1995 and Fiscal
1994 include 52 weeks. Quarterly results are presented based on 12,
12, 12 and 16 or 17 week quarters.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or
less to be cash equivalents.
Inventories - Inventories, representing food items and supplies, are
stated at the lower of cost (first-in, first-out) or market.
Pre-opening Costs - Labor costs and costs of hiring and training
personnel and certain other direct costs related to opening new
restaurants are capitalized until the restaurant is opened and then
amortized over a twelve month period.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for maintenance and repairs which do not significantly
extend the useful lives of assets are charged to earnings; additions,
betterments and interest costs incurred during construction are
capitalized. Gains and losses on dispositions are charged or credited
to operations.
Depreciation of property and equipment is provided primarily over the
estimated useful lives of the respective assets on a straight-line
basis. Generally, the depreciable lives are the shorter of 15 years
or the term of the related land leases for buildings, 15 years for
land improvements, and five to seven years for furniture and
equipment. Leasehold improvements are amortized over the shorter of
15 years or the maximum term of the related lease.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of'" which requires impairment losses to be recorded on long-
lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. The Company
has evaluated the carrying values of its long-lived assets in
operations based on the criteria set forth in this statement and has
determined that no writedown for impairment is necessary as of
January 3, 1997.
Costs and Expenses - The principal costs and expenses of the
Company's operations include (i) cost of restaurant sales, which
consists principally of food, beverage and supply costs, (ii) labor
costs, which consist primarily of wages for wait staff and food
preparers, (iii) other operating expenses, which principally consist
of occupancy costs such as rent, utilities, building maintenance,
insurance and taxes, as well as equipment rentals and repairs, bank
transaction charges and miscellaneous restaurant expenses, and (iv)
general and administrative expenses, consisting of wages for
management, supervisory and other corporate personnel and other
personnel costs, costs of advertising and promotions and other
expenses.
Advertising - The Company expenses the production cost of advertising
as incurred. Advertising expense was $619,000 in fiscal 1996,
$515,000 in fiscal 1995 and $310,000 in fiscal 1994.
Income Taxes - Prior to Fiscal 1996, nineteen of the Restaurant
Corporations and Connor Management were S Corporations for purposes
of the Internal Revenue Code. These S Corporations were exempt from
Federal and state income taxes, and applicable taxable income or loss
was allocated to the shareholders. The remaining three Restaurant
Corporations, all of which began operations in 1992, were C
Corporations. For the C Corporations and Sagebrush, Inc., income
taxes were provided for temporary differences between the tax and
financial accounting bases of assets and liabilities using the asset
and liability method. The tax effects of such differences are
reflected in the balance sheet using the enacted tax rates expected
to apply in the period in which the differences reverse (See Note 7).
Beginning in Fiscal 1996, all of the former S Corporations converted
to C Corporations and income taxes are provided using the asset and
liability method discussed above.
Fair Value of Financial Instruments - The carrying amounts of the
Company's financial instruments approximate their fair values due to
short terms to maturity (including debt which was repaid in January
1996 from the proceeds of the public offering).
Earnings Per Share - Earnings per share are calculated on the
weighted average shares of common stock and dilutive common stock
equivalents.
NOTE 3 - Property and Equipment
The major components of property and equipment are as follows:
January 3, December 29,
1997 1995
Land $ 2,329,338 $ 385,943
Land improvements 402,050 210,137
Buildings 3,392,287 1,746,681
Leasehold improvements 4,739,772 3,530,624
Machinery and equipment 3,706,605 2,593,290
Furniture and fixtures 1,785,906 1,136,240
Construction in progress 852,154 -
Total Cost 17,208,112 9,602,915
Less accumulated depreciation 2,945,380 2,040,483
Property and equipment, net $ 14,262,732 $ 7,562,432
NOTE 4 - Financing Arrangements
During Fiscal 1996, the Company had a commitment from a commercial
bank for a revolving credit facility providing for borrowings of up
to $6.0 million (with a participation by another bank for advances
over $3.0 million). Advances under the line were unsecured and
limited to short-term working capital purposes. The facility expired
on January 31, 1997.
Borrowings under this line of credit as of January 3, 1997 totaled
$460,000, which was also the maximum amount outstanding during Fiscal
1996. The average amount outstanding during Fiscal 1996 was $102,426.
Both the interest rate at January 3, 1997 and the weighted average
rate for Fiscal 1996 were 8.25%.
In January 1997, the Company obtained a commitment from a commercial
bank for a revolving credit facility providing for borrowings of up
to $3.0 million. Advances under the line will be unsecured and
limited to short-term working capital purposes. The facility will
expire on January 31, 1998 and the interest rate for borrowings will
be the bank's prime rate.
All long-term debt existing at December 29, 1995, was paid off at
face value subsequent to December 29, 1995 using proceeds from the
public offering of common stock. Accordingly, at December 29, 1995,
current maturities of long-term debt of $907,002 were classified as
long-term debt due to the Company's intention and ability to
refinance such debt with equity securities.
Debt with originally scheduled maturities as of December 29, 1995,
was as follows:
Installments Final December 29,
Payee Payable Rate Maturity 1995
Bank Monthly Prime + 1% 2004 $ 381,468
Monthly Prime - 1% 2006 273,309
Monthly Prime + 1% 1995 29,606
Monthly Prime + 1% 1997 30,522
Monthly Prime + .5% 1997 147,134
Monthly Prime + .5% 1996 643,314
Monthly 9% 2000 389,646
Related party Monthly Prime + 1% 1996 4,822
Other Monthly 8% 1999 288,088
Total $ 2,187,909
The applicable prime rate at December 29, 1995 was 8.5%.
NOTE 5 - Leased Properties
Certain premises occupied by the Company are under operating leases
with terms expiring from 1997 through 2012. Two of the restaurants
are in buildings owned by the Company and located on land that is
leased; the Company owns both the building and land for four of the
restaurants; the remaining restaurant buildings and land are leased.
Most of the leases are with related parties (Note 6).
The leases have remaining renewal clauses, exercisable at the option
of the lessee, of one to 15 years, some of which provide for
increased rents. Certain of the leases are for equipment as well as
for premises. In addition, certain leases contain provisions
providing for contingent rentals based on a percentage of gross sales
or for scheduled increases in base rents.
Future minimum rental payments required under operating leases are
summarized as follows:
Fiscal Year
1997 $ 1,396,191
1998 990,378
1999 968,603
2000 879,890
2001 776,290
Thereafter 3,264,883
Total $ 8,276,235
Rental expense charged to operations was $1,663,579, $1,434,154 and
$1,085,628 (which includes contingent rentals of $197,760, $162,915
and $59,034) in fiscal 1996, 1995 and 1994, respectively.
NOTE 6 - Transactions with Related Parties
The Company has transactions, in the normal course of business, with
certain related individuals and with certain corporations in which
the Company's principal shareholders have a substantial direct or
indirect ownership interest. These transactions are summarized below:
January 3, December 29, December 30,
1997 1995 1994
During the Year
Rents paid (Note 5) $ 1,133,875 $ 1,002,283 $ 792,463
Equipment and supply purchases 1,083,281 492,125 397,438
Insurance expenses 708,780 685,584 664,851
Store decorating costs paid 96,503 37,399 55,294
Fees received for accounting services
provided to other restaurants 80,950 83,025 73,625
End of Year
Receivables from shareholders (all paid subsequently)
- - 27,000
Other related party receivables 24,175 100,423
Accounts payable 115,094 98,724
Notes payable (Note 4)
- - 4,822
Other related party receivables primarily consist of receivables from
other restaurants managed by Connor Management, Inc.
NOTE 7 - Income Taxes
Prior to Fiscal 1996, income taxes have been provided for the three C
Corporations (see Note 2). Deferred income taxes for the three C
Corporations, arising principally from loss carryforwards and the
temporary differences in book and tax depreciation, were not material
in any of the years presented prior to Fiscal 1996. See Note 10 for
discussion of pro forma income taxes. The tables below present
information related to the income tax provision for Fiscal 1996.
Fiscal 1996
Amount %
Statutory rate reconciliation
Pre-tax earnings $4,034,528 100.0%
Federal income tax at
statutory rate 1,371,740 34.0
State income taxes-net of
federal tax benefit 185,812 4.6
Other 17,744 .4
Total income tax provision $1,575,296 39.0%
Components of income tax provision
Current
Federal $1,015,128 64.4%
State 209,931 13.4
Total Current 1,225,059 77.8
Deferred
Federal 294,296 18.7
State 55,941 3.5
Total Deferred 350,237 22.2
Total Income Tax Provision $1,575,296 100.0%
The tax effect of cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities at January
3, 1997, are as follows:
January 3, 1997
Assets Liabilities Total
Excess Tax Over Book Depreciation - $(288,158) $(288,158)
Pre-opening costs - (30,875) (30,875)
Basis write-up, reorganization 116,679 - 116,679
Other, Net - (6,117) (6,117)
Total $116,679 $(325,150) $(208,471)
Management has evaluated the realizability of the deferred tax asset
and believes that no valuation allowance is necessary at January 3,
1997
NOTE 8 - Employee Stock Option Plan
The Company adopted a stock option plan which became effective as of
the closing date of the public offering. The plan allows for
incentive and non-qualified stock options and stock appreciation
rights to be granted to those key employees that the Compensation
Committee of the Board of Directors may select. A total of 600,000
shares of common stock have been reserved for issuance upon exercise
of the options to be granted. Options granted may have a maximum term
of ten years and may be granted until November 1, 2005. At January 3,
1997, there were 241,000 shares available for grant. Option
information is summarized as follows:
Option Price
Shares per Share
Outstanding December 29, 1995 - -
Granted in Fiscal 1996 387,500 $8.875
Canceled or expired in Fiscal 1996 (28,500) $8.875
Outstanding January 3, 1997 359,000 $8.875
All options granted are incentive stock options with the option price
no less than the fair market value of the common stock on the date of
grant. Options begin vesting two years after the grant date and are
fully vested after five years. The outstanding stock options at
January 3, 1997 have a weighted average exercise price of $8.875 and
a weighted average contractual life of 9 1/2 years.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its stock
options granted. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for
the awards under those plans consistent with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," the Company's pro forma net income and net
income per share for the year ended January 3, 1997 would have been
$2,356,000 and $.37, respectively.
The fair value of options granted under the Company's stock option
plan during Fiscal 1996 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-
average assumptions used: no dividend yield, expected volatility of
25%, risk free interest rate of 6.5%, and expected lives of 4 1/2 years.
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
NOTE 9 - Employee Health Insurance Benefits
The Company provides employee health insurance benefits under a
419(e) trust arrangement. These benefits are partially funded by the
Company. The Company has $25,000 per participant and $1,000,000
annual aggregate stop loss coverage on group medical claims with an
insurance carrier. A third-party administrator handles all claims.
The Company's contributions to this plan were approximately $121,000,
$121,000 and $120,000 in fiscal 1996, 1995 and 1994, respectively.
The Company provides no post-retirement or post-employment benefits.
NOTE 10 - Commitments, Contingencies and Litigation
See Note 5 concerning commitments related to lease agreements.
The Company had a purchase commitment of approximately $400,000 as of
January 3, 1997 for construction of a restaurant in Salisbury, NC.
The Company knows of no material pending legal proceedings to which
the Company or any of its subsidiaries or related companies is a
party.
NOTE 11 - Pro Forma Data (Unaudited)
In connection with the reorganization described in Note 1, certain of
the Restaurant Corporations and Connor Management became wholly-owned
subsidiaries of Sagebrush, Inc. and terminated their elections to be
treated as S Corporations. The Related Corporations distributed all S
Corporation earnings through the date of such termination from
available cash and, as stated in Note 1, Sagebrush, Inc. paid
approximately $5.2 million of the proceeds from the offering to or
for the benefit of its current shareholders as part of the
reorganization.
Pro forma net income reflects an anticipated increase in compensation
expense and the application of corporate income taxes to pro forma
income before income taxes at an effective tax rate of 39% of
$500,000 and $1,200,000, respectively, which reflects the estimated
combined federal and state income tax rate.
Pro forma net income per share is calculated as if all shares of
Sagebrush, Inc. common stock outstanding immediately prior to the
offering (4,500,000) were outstanding since December 31, 1994 and
include additional shares (962,748) issued at the offering price of
$7.00 per share, reduced by offering expenses and underwriting
discounts of 11.1%, to fund the distribution of S Corporation
earnings undistributed at December 29, 1995 and the $5.2 million
referred to above.
*****
Item 8 - Selected Quarterly Data.
(Unaudited)
Fiscal 1996
Quarter ended March 22 June 14 September 6 January 3
Net sales $7,832 $8,932 $10,051 $15,295
Operating income 758 933 970 1,206
Net income 479 619 631 730
Net income per share $ .08 $ .10 $ .10 $ .12
Fiscal 1995
Quarter ended March 24 June 16 September 8 December 29
Net sales $7,224 $7,698 $8,460 $10,638
Operating income 761 724 939 1,227
Net income 721 702 907 1,194
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
Part III
Item 10 - Directors and Executive Officers of the Registrant.
Reference is made to "Election of Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" included in the
definitive Proxy Statement which will be filed with the Commission no later
than May 2,1997 and is hereby incorporated by reference.
Item 11 - Executive Compensation.
Reference is made to "Executive Compensation", "Director Compensation",
"Board of Directors Report on Executive Compensation", "Shareholder Return
Performance Graph" and "Compensation Committee Interlocks and Insider
Participation" included in the definitive Proxy Statement which will be filed
with the Commission no later than May 2,1997 and is hereby incorporated by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.
Reference is made to "Principal Shareholders and Holdings of Management" and
"Election of Directors" included in the definitive Proxy Statement which will be
filed with the Commission no later than May 2,1997 and is hereby incorporated by
reference.
Item 13 - Certain Relationships and Related Transactions.
Reference is made to "Compensation Committee Interlocks and Insider
Participation" included in the definitive Proxy Statement which will be filed
with the Commission no later than May 2,1997 and is hereby incorporated by
reference.
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) 1. Financial Statements
The following financial statements of the Company are included at pages
22 to 35 hereof.
Independent Auditors' Report
Consolidated Balance Sheets as of January 3, 1997 and
December 29, 1995
Consolidated Statements of Income for the Fiscal Years Ended
January 3, 1997, December 31, 1995 and December 30, 1994
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended January 3, 1997, December 31, 1995 and December 30, 1994
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 3, 1997, December 31, 1995 and December 30, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules are omitted because of the absence of conditions under which they
are required or because information required is included in financial statements
or the notes thereto.
3. Exhibits
(3.1) Amended and Restated Articles of Incorporation of the Company (filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
No. 33-98914) and incorporated by reference herein).
(3.2) Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated by
reference herein).
(10.1) Agreement dated as of March 16, 1992 by and between the Company and
Biggers Brothers, Inc. (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated
by reference herein).
(10.2) 1995 Stock Option Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated
by reference herein).*
(10.3) Form of restaurant lease with related parties.
(10.6) Letter of Agreement dated January 28, 1997 between Peoples Bank and the
Company.
(10.7) Note dated January 31, 1997 between Peoples Bank and the Company.
(21) Subsidiaries of the Company.
(27) Financial Data Schedule. (filed in electronic format only)
________________
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the registrant during the last
quarter of the period covered by this report.
(c)Exhibits.
See Item 14(a)(3).
(d)Financial Statement Schedules.
Not applicable.
Part IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Sagebrush, Inc.
By: /s/ L. Dent Miller
Name: L. Dent Miller
Title: President, Chief Executive Officer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Charles F. Connor, Jr. Director and April 1, 1997
Charles F. Connor, Jr. Chairman of the Board
/s/ L. Dent Miller Director and President April 1, 1997
L. Dent Miller and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael A. Shubert Director and Executive April 1, 1997
Michael A Shubert Vice President and
Chief Operating Officer
/s/ Barry W. Whisnant Director April 1, 1997
Barry W. Whisnant
/s/ C. Kenneth Wilcox Director April 1, 1997
C. Kenneth Wilcox
/s/ Noland M. Mewborn Vice President, Treasurer and April 1, 1997
Noland M. Mewborn Chief Financial Officer
(Principal Financial Officer)
/s/ Gary E. Abernethy Controller April 1, 1997
Gary E. Abernethy (Principal Accounting Officer)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
EXHIBITS
Item 14(a)(3)
FORM 10-K
ANNUAL REPORT
For the fiscal year ended Commission File Number
January 3, 1997 0-27258
SAGEBRUSH, INC.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
(3.1) Amended and Restated Articles of Incorporation (filed as exhibit 3.1
to the Company's Registration Statement on Form S-1 (No. 33-98914)
and incorporated by reference herein).
(3.2) Bylaws of the Company (filed as exhibit 3.2 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated
by reference herein).
(10.1) Agreement dated as of March 16, 1992 by and between the Company and
Biggers Brothers, Inc. (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated
by reference herein).
(10.2) 1995 Stock Option Plan (filed as exhibit 10.2 to the Company's
Registration Statement on Form S-1 (No. 33-98914) and incorporated
by reference herein).
(10.3) Form of restaurant lease with related parties.
(10.6) Letter of agreement dated January 28, 1997 between Peoples Bank and
the Company.
(10.7) Note dated January 31, 1997 between Peoples Bank and the Company.
(21) Subsidiaries of the Company.
(27) Financial Data Schedule. (filed in electronic format only)